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MCAN Mortgage Corporation reports third quarter earnings

Stock market symbol
TSX: MKP
TORONTO, Nov. 2 /CNW/ - MCAN Mortgage Corporation ("MCAN", the "Company"
or "we") reported net income of $3.1 million for the third quarter of 2007,
down from $3.5 million a year earlier. Earnings per share for the quarter were
$0.21 compared to $0.28 last year. Net income for the nine months ended
September 30, 2007 was $11.7 million, up from $10.0 million a year earlier,
while earnings per share in the same period were $0.89 compared to $0.81 in
2006. The 2006 year-to-date earnings per share have been restated from $0.82
to $0.81 and 2007 second quarter earnings per share have been restated from
$0.34 to $0.33 to reflect the impact of the rights offering that we completed
in the third quarter.
Rights Offering: The Company successfully completed a rights offering
that expired on July 5, 2007. The rights offering raised gross proceeds of
$16.4 million with 1,559,981 new common shares issued. This resulted in
additional investment capacity of $94 million.
Net Investment Income: Net investment income for the third quarter
decreased from $4.4 million in 2006 to $4.1 million in 2007.
Mortgage interest income increased from $6.4 million to $7.2 million. The
average portfolio increased by $39 million as a result of higher asset
capacity from the rights offering, and the average yield increased by 0.20%
due to a higher prime rate.
Interest on loans and other investments increased from $1.2 million to
$1.4 million as a result of an increase in the size of the portfolio and an
increase in prime.
Fees earned in the quarter of $858,000 were comparable to the prior year.
Marketable securities income decreased from $656,000 to $40,000. The
Company commenced selling off its marketable securities in November 2006
following statements by the federal government regarding the future taxation
of income trusts. The portfolio was $175,000 at September 30, 2007 compared to
$24 million at September 30, 2006.
Equity income from our ownership in MCAP Commercial LP ("MCLP") was
$946,000 in the quarter compared to $290,000 in 2006. MCLP had a higher volume
of loan production in 2007.
Subsequent to quarter end, we were advised by the Canada Mortgage and
Housing Corporation that there would be a change in permitted investments for
Canada Mortgage Bonds ("CMB") principal collections, such that our expected
future investment yields have been reduced. As a result, we recognized a
securitization loss of $141,000 during the quarter relating to the
securitization of insured residential mortgages through the CMB program,
primarily due to write-downs of the interest-only strips from the March and
June issuances, which represent the discounted value of future cash flows. We
also expect that the current disruption in debt markets will adversely impact
the profitability of future CMB issuances.
Term deposit interest and expenses increased from $3.9 million in 2006 to
$4.9 million in 2007. The average interest rate increased by 0.50% due to a
significant increase in the cost of new fundings, and the average outstanding
balance increased by $31 million as a result of increased capacity from the
rights offering.
The securitization programs that we have participated in have been
impacted by repricing in debt markets. We have not received sufficient
information to assess fully the degree to which our investments have been
impaired. Based on the available information, we have taken a write-down of
$700,000 on our securitization investments. The repricing process is not yet
complete and may have a further impact on the returns on some of our
investments in securitization programs.
Allowances for loan losses were increased by $334,000 during the quarter
compared to an increase of $428,000 for the same period last year. This was
the result of a $35 million increase in outstanding mortgages during the
quarter, compared to a $42 million increase in 2006. No new specific
allowances were required during the quarter and write-offs were not material.
Impaired loans net of specific allowances were 0.61%, compared to 0.43% at
June 30, 2007 and 0.54% at September 30, 2006.
Operating Expenses: Operating expenses of $1.0 million were consistent
with 2006.
Financial Position: As of September 30, 2007, total consolidated assets
were $548 million, an increase of $80 million from June 30, 2007. The
substantial asset growth in the quarter was a result of additional asset
capacity created through the rights offering. The growth in assets since June
30, 2007 consists of increases of $37 million in cash, $35 million in
mortgages and $10 million in loans and other investments. Term deposit
liabilities were $437 million at September 30, 2007, up $60 million from June
30, 2007. Total shareholders' equity of $103 million was up $17 million from
June 30, 2007. Activity for the quarter consisted of the issuance of
$16 million of new common shares through the rights offering, net income of
$3.1 million and an increase to accumulated other comprehensive income of
$785,000, offset by the third quarter dividend of $3.2 million.
Outlook: Our primary objective is to fully invest the balance sheet while
maintaining acceptable and sustainable returns. We are subject to maximum
asset levels under both the Income Tax Act (Canada) (the "Tax Act") and the
Trust and Loan Companies Act. The maximum asset level permitted under the Tax
Act, which is the most constraining for us, effectively limits assets to 6
times capital on a non-consolidated basis, measured at tax values. We manage
our assets to a level of 5.75 times capital to provide a prudent cushion
between the maximum and total actual assets. We experienced significant asset
growth during the third quarter as a result of additional capacity created
through the rights offering. We have not yet fully levered our new capital,
and as a result of this we were underinvested by $47 million at quarter end
against our 5.75 internal limit. Our objective is now to fully invest our
remaining asset capacity from the rights offering by the second quarter of
2008. We had initially planned to be fully invested by the first quarter of
2008 but have revised this time frame based on available mortgage funding
opportunities. Maintaining our balance sheet at full investment will depend on
our ability to find assets with satisfactory yields at manageable levels of
risk. Our operations and income are a function of the interest rate
environment and the availability of mortgage product at reasonable yields. The
availability of mortgage product for us and the yields thereon is based on
market competition.
MCAN has no exposure to the United States mortgage market. The Company
invests in insured and uninsured residential mortgages in Canada, which are
lower risk than United States sub-prime mortgages. The uninsured mortgages may
not exceed 80% of the value of the real estate securing such loans ("LTV") and
are usually below 75% LTV. Unlike the United States, the Canadian residential
property market continues to exhibit healthy fundamentals.
The disruption in debt markets has not affected the capital or liquidity
of the Company.
Dividend: The Board of Directors declared a fourth quarter dividend of
$0.23 per share to be paid January 2, 2008 to shareholders of record as of
December 17, 2007.
Further Information: Complete copies of the Company's 2007 Third Quarter
Report will be filed on the System for Electronic Document Analysis and
Retrieval ("SEDAR") at www.sedar.com and on the Company's website at
www.mcanmortgage.com by November 14, 2007.
This report may contain forward-looking statements, including statements
regarding the business and anticipated financial performance of the Company.
These statements are subject to a number of risks and uncertainties that may
cause actual results to differ materially from those contemplated by the
forward-looking statements. Some of the factors that could cause such
differences include legislative or regulatory developments, competition,
technology change, global market activity, interest rates, changes in
government and economic policy and general economic conditions in geographic
areas where the Company operates. Reference is made to the risk factors
disclosed in the Company's 2007 Annual Information Form, which are
incorporated herein by reference. These and other factors should be considered
carefully and undue reliance should not be placed on the Company's
forward-looking statements. Subject to applicable securities law requirements,
we do not undertake to update any forward-looking statements.